Monday, January 21, 2008

The Clinton Plan

Her first priority, she said, would be changing the tax code. She has proposed tax credits for college tuition, retirement savings, health care and alternative energy use, most of which would go to lower- and middle-income families. She would also raise the top marginal rate to 39.6 percent, its level for much of her husband’s administration. Increasing high-end tax rates would bring in $52 billion a year, her campaign says, and help pay for some of her other proposals.

A few observations:

1. The $52 billion estimate seems high to me. The CBO reports that each percentage-point increase in the top two income tax rates--singles making over about $150K, married taxpayers over about $180K--increases tax revenue by only $6.5 billion in 2009. Multiply that by 4.6 (the proposed rate increase), and you get $29 billion, not $52 billion. And even that $6.5 billion is an overestimate, because it includes the top two rates, not just the top rate. I would guess that the Clinton campaign included other tax increases in the $52 billion figure, such as increases in the tax rates for dividends and capital gains.

2. Even taking the $52 billion estimate at face value, it shows how little revenue would come from increasing taxes on the rich. This is only about 1/3 of one percent of GDP.

3. The passage from Leonhardt makes clear that Senator Clinton wants to spend the extra revenue on other proposals, instead of using it to reduce the long-term fiscal gap.

4. The passage says that this revenue will "help pay" for her other proposals, instead of fully paying for them. The entire package seems to involve either an expanded deficit or other taxes increases (or spending cuts) to be named later.

Update: An informed reader directs me to the source for the $52 billion figure (see page 13), which makes clear that the proposal is to increase the top two rates, not just the top rate. According to this document, Cinton also proposes to raise additional revenue through the less obvious tax hikes known as PEP/Pease, which make the effective marginal tax rate higher than the statutory rate.

My informed reader says that the Clinton campaign has not taken a position on dividends and capital gains tax rates. Some journalist out there ought to ask the candidate about it, especially in light of the stock market's recent performance.

About Me

I am the Robert M. Beren Professor of Economics at Harvard University, where I teach introductory economics (ec 10). I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.